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March 22, 2006


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OK, I've got a question.

What comes first credit card payoff, emergency fund, or both? Do I put all savings cash into credit cards then an emergency fund? or all savings cash into the emergency fund then the credit cards? or alternate them somehow maybe paying off a month of income then saving a month of income.

If I only pay off the cards I'm living without an emergency fund for the few years that takes. If I only save the money I'm paying interest those years.

Marty --

From what I've read, it's a great debate -- emergency fund or pay off debt. All I can tell you is what I'd do:

1. I'd cut all unnecessary spending as much as possible.

2. I'd also use "found" money like raises, extra income, gifts, tax returns, etc. to...

3. off the credit cards first, then save for emergencies.

I put the first two in there because most people want to still spend like normal (which means out of control) and then decide which one to do -- save for an emergency fund or pay off a debt. If they do 1 and 2, they can usually pay off debt fairly quickly so the amount of time they are without an emergency fund is rather limited.

Pay off your credit cards first. Especially if they are still open and you'll have revolving credit available. Because with available credit, you will always be able to dip into that pool later, if you need it.

Plus, when you pay down your revolving debt, your credit score will go way up - that means you'll have more options.

Last, do the math:
$10,000 of revolving (credit card) debt, charging 15% interest, will charge you $1500 per year, just to tread water.
$10,000 in a savings account, earning 4.5% interest, will make you $450 per year (then you have to pay taxes on that $450).

Most important, though, learn about money. Learn about compounding, different types of investments, and as cheesy as it sounds, learn how to make money work for you, instead of you working for money. Do you know a word that represents working for money? Prostitution. Anyway, soap box aside, it can be programming a VCR.

Emergency fund vs. paying off debt
I like the Dave Ramsey advice on this one. His suggestion is to have a "baby" emergency fund of $1K in the bank, then pay off debt. After you have debt paid off then build up the emergency fund to the recommended amount of 3-6 months of expenses.

My husband and I had been paycheck-to-paycheck people, and we still have it tight, but having that $1K makes SUCH a tremendous difference, relieving stress when facing an emergency. We thought we were going to need a new refrigerator last year, and it was such a relief to know that the money was there if we did.

My job closed up I worked for 25 yrs., My new job, I took a $15,000 pay cut a year. Im a single dad, divored for 7yrs, raising my two kids on my own. Stuck in bad mortgage where I pay interest only, cant get out of it because of $25,000 debt and because of wages. I pay my mortgages on time and never late on card payments, credit score of 735 and a ratio of 95-100%. Im am now at my last pennys and cant seek help from no one. Ready to declair bankruptcy soon. Can someone help me?

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